WhatsApp is one of the most popular messaging apps in the world right now. More than 2 billion people across 180 countries use WhatsApp to stay in touch with friends, family, work colleagues, and more. It is available everywhere, 24/7. All you need is WiFi or a mobile data connection.
Anyone can download the app without spending a dime, there are no advertisements on it, and you don’t have to pay for any premium features because they don’t even exist to begin with. So, how does WhatsApp cover its costs?
In this article, I’ll walk you through the history of WhatsApp, followed by the business model of WhatsApp that helped it generate an estimated revenue of $5.5 billion in 2020.
Overview Of WhatsApp
WhatsApp or WhatsApp Messenger is a free messaging application that is owned by Facebook. Inc. Its headquarters are in Mountain View, California, United States. WhatsApp allows you to send text and voice messages, make voice and video calls, and share pictures, videos, documents, audio files and location.
Here’s where it gets interesting. WhatsApp wasn’t always free. To understand why, we first look into its origin story.
History Of Whatsapp (2009-2021)
It all started with two ex-employees of Yahoo! — Jan Koum and Brian Acton — who saw an opportunity for app creation on the Apple play store and went for it with their startup idea: To create an app where people could put their status next to their names. Such a status could read anything the person was doing; travelling, driving, busy, in a business meeting, etc.
Both of them belong to the “advertisement hate club.” They don’t like the idea of advertisements popping up all over the app because it ruins the user experience, and have held onto this principle since day one.
Initial Bump In The Road
Jan Koum and Brian Acton hired Igor Solomennikov, an iPhone developer from RentACoder.com to develop the WhatsApp app that would answer the question of “What’s up?” for everyone on it.
However, the first version of the app wasn’t as functional as they had hoped. It kept crashing. Koum gave up on it, but his friend, Acton, encouraged him to wait for a few months and see what happens.
It turns out, Acton was right. In 2009, things started to look up for WhatsApp when Apple launched push notifications. Now every time someone would change their status on WhatsApp, their friends would receive a notification about it.
Soon, everyone would update their status with what they were doing, and their friends would get pinged about it. Their friends, in turn, would change their status as a reply to that notification. Such an exchange between friends sounded a lot like instant messaging.
Koum added the component of messaging and released WhatsApp 2.0 and saw the number of active users suddenly roll up to 250,000.
“Being able to reach somebody halfway across the world instantly, on a device that is always with you, was powerful,” says Koum.
Where Did Seed Money Come From?
In October 2009, the first round of funding came from five ex-Yahoo friends who invested $250,000. The second and third round of funding came from Sequoia Capital. They invested $8 million in 2011 and $50 million in 2013.
Launching WhatsApp On App Store
In November 2009, WhatsApp messenger appeared on the Apple App Store. By 2010, it was available for Blackberry, Symbian, and Android OS.
$1 Price Tag
It cost money to send people their WhatsApp sign-up verification codes via SMS. And to compensate for that, the sign-up cost was set to $1. But this price tag didn’t stop WhatsApp from ranking as one of the top 20 apps on the iPhone U.S app store.
By the end of 2013, WhatsApp was valued at $1.5 billion, with 400 million active users per month.
Facebook Acquisition — Whatsapp Today
On February 19, 2014, Facebook acquired WhatsApp for $19 billion, and the following changes followed through the years:
- Removal of the $1 price tag
- Implementation of end-to-end encryption
- Addition of voice calls
- Business communication
- Addition of a status feature like that of Facebook stories
- Whatsapp stickers
- An option to switch to the “dark mode”
- Feature for muting chats and groups
How Does Whatsapp Make Money?
In this section, we will look at the business model that WhatsApp has used in the past, the current business model it follows, and its plans for generating more revenue in the future.
Before Facebook Acquisition: Freemium Business Model
As discussed earlier, WhatsApp stayed afloat with its freemium business model in 2009. Under this model, you could download the app, sign up on it, and use it free of cost for the entire year. But after the first year, you had to pay $1 yearly to keep the WhatsApp messenger app service active.
Current Business Model
After the acquisition of WhatsApp by Facebook in 2014, the $1 fee was waived off. Today, WhatsApp has no business revenue model per se, but it still manages to bring in money for Facebook in one way or another. Let’s look at those strategies one by one.
1. Whatsapp For Business
WhatsApp Business app was launched in January 2018 by Mark. What this app does is facilitate small and large businesses to communicate with their clients and offer customer support. When people see that they are talking to someone with a verified business account, it adds credibility and trust to the business. After the launch, many big companies such as Netflix, Uber and Wish tested this service for their businesses. WhatsApp Business offers two levels of service; level 1 and level 2.
Level 1: Free
Level 1 is free for small businesses. It allows you to organise and label your contacts, create a broadcast list, send automated responses when you’re away, send message templates as quick responses, and showcase a catalogue of all your products with their prices. However, this level cannot support a large number of contacts.
Level 2: Paid (WhatsApp For business API)
If you have more than 300 customers contacting you, you’d need to switch to level 2: WhatsApp business API. It’s ideal for large enterprises, like a bank or an airlines service. WhatsApp makes money from its business API in two ways:
- Charging money for slow replies: If a customer places a query and you don’t reply within 24 hours, you get charged per message. Charges vary from country to country. It ensures prompt customer service as companies try to save costs by replying fast. It also makes people prefer WhatsApp over other apps because they get quick replies here.
- Sending business initiated template messages: If your customer doesn’t message your app in under 24 hours, you can send them a template message to remind them of it. Such templates can take the form of text, files, images, or audios. They are pre-approved by WhatsApp and include information about payment confirmation, package processing and preparation, time of shipping, tracking number of the order, etc. Every template message that you send has a price, which varies with the target country.
2. Click to WhatsApp Ads
Another way that Mark Zuckerberg uses WhatsApp to generate revenue is by “Click to WhatsApp” ads on Facebook, creating a bridge between the two platforms. It allows businesses to put up their ads on Facebook featuring the WhatsApp option where customers can click to contact them via call or message on WhatsApp.
“Many people already use WhatsApp to communicate with small businesses. It’s a fast, convenient way to stay in touch,” says Pancham Gajjar, product marketing manager, Facebook. “By adding a click-to-WhatsApp button to Facebook ads, businesses can now make it even easier for people to learn about their products, set up an appointment or use their service.”
As these ads are displayed on Facebook and not on WhatsApp, we cannot say that WhatsApp is making this money. But we can say that WhatsApp is helping another one of Mark’s platforms, i.e., Facebook, generate revenue for him.
3. WhatsApp Payment Service
WhatsApp has added a new feature called Whatsapp Pay exclusively for India at the moment. You can send money to anyone you want from your contact list through this service. All you need is a bank account and an active debit card in India. For every transaction that you make, Facebook takes its commission out of it.
According to a Facebook blog post, “We designed our payments feature on WhatsApp in partnership with the National Payments Corporation of India (NPCI) using the Unified Payment Interface (UPI), an India-first, real-time payment system that enables transactions with over 160 supported banks. We’re excited to join India’s campaign to increase the ease and use of digital payments, which is helping expand financial inclusion in India.”
However, NPCI (National Payments Corporation of India) implemented a 30% cap on total payment volumes via third party payment apps from January 1, 2021. This is why the feature is only available for 20 million WhatsApp users in India and currently works with five banks; ICICI Bank, HDFC Bank, Axis Bank, the State Bank of India, and Jio Payments Bank.
WhatsApp Revenue Model and Future Revenue Streams
In the future, the following revenue streams will help strengthen WhatsApp’s Business model.
1. Ads In The Status Section
Introducing ads in the WhatsApp status section has been an idea for quite some time now. But the company remains indecisive about it because it was the “no ads, no games and no gimmicks” policy of WhatsApp that drove people towards this app in the first place.
2. Whatsapp Pay In Other Countries
Rolling out WhatsApp Pay in India is a good start, but there is a lot of benefit for the company to launch this feature in other countries as well. It would help to have one app (WhatsApp) for communication and money transfer instead of two separate apps for the same purposes.
3. Leveraging Data From Whatsapp For Businesses
WhatsApp plans to introduce a paid tool for businesses. It will give them insights into user data, and help them understand customer behaviour patterns to streamline the user experience.
WhatsApp Business Model
WhatsApp has been a great example of entrepreneurship and has reached its current value by having an incredible journey. The reason why so many questions are asked about how WhatsApp generates revenue is that the WhatsApp application does not show ads and this mobile application is free.
The most important reason why we can’t see ads on WhatsApp is that its founders don’t like ads. However, from the day Facebook bought the WhatsApp application, people began to think that they could see ads at any time.
Since Facebook is the world’s largest social media platform that generates revenue from ads, we thought we would see ads during messaging when it bought WhatsApp. But Facebook managed to surprise everyone by not placing ads on this application.
By 2014, WhatsApp had 450 million monthly active users, and now, as you can imagine, there are billions of users. Some executives and shareholders in WhatsApp were actually dissatisfied with the sale of this mobile app to Facebook.
Facebook’s advertising policies and its stance on people’s privacy have been met with skepticism by some WhatsApp executives.
Does WhatsApp Make Money?
Some companies started to invest millions of dollars in WhatsApp, but they still did not have a revenue model. Whatsapp, which refused to accept ads, ran free for 1 year, then started selling subscriptions for less than $1, but still allowed continued messaging for free.
Facebook bought WhatsApp in 2014 for $19 billion, the highest fee ever paid, and began making changes and improving the app. For Facebook, the revenue model didn’t matter at the time. Because Facebook wanted to dominate in communication, a situation similar to its acquisition of Instagram occurred.
Investors who invested in WhatsApp suddenly reached billions of dollars in wealth, and the whole world saw how well they made the right decision. Sequoia Capital, one of the companies that invested in WhatsApp, earned a huge income. They were a huge success, earning $3 billion from WhatsApp, where they only invested $58 million.
After this sale took place, a statement came from Facebook, they said that there will be no change for users. They said that WhatsApp will work on all phones as before and can be used in all countries. They also answered the advertisement issue on everyone’s mind and said that no advertisements that would hinder communication would be displayed.
Learning that WhatsApp would work in line with its vision and mission prevented it from losing users and changed the way people view Facebook a bit.
Since Facebook has remained the social media giant for years, it knew that if it started showing ads on WhatsApp, it would lose users and was confident that it would grow rapidly in WhatsApp alternative applications.
How WhatsApp Makes Money?
Facebook, which invested $19 billion in an application that does not even show ads, of course, did not do this for anything. Facebook had the data and messaging of billions of people and everyone was starting to think that Facebook would use this data.
Without the pressure to monetize in the early years, WhatsApp continued to grow and reached billions of users. Later, Facebook tried to gain people’s trust by announcing that WhatsApp had end-to-end encryption to remove people’s doubts and that even WhatsApp could not see these correspondences.
Years later, WhatsApp developed 2 ways to earn money: WhatsApp for Business and WhatsApp Pay. Companies like Netflix and Uber have started testing WhatsApp for Business and are leading the way.
In the future, WhatsApp plans to make money with 2 new methods. One of them is to show ads in the Status section of WhatsApp and the other is to pay with WhatsApp Payment.
We will see together how social media companies and messaging applications such as WhatsApp will evolve in the coming years.
As of now, WhatsApp does not have a concrete business model for generating revenue. But with its future plans, it will generate more revenue by incorporating ads in its app. The question is how to move from an ads-free model to an ad-based revenue model while still retaining the current consumer base.
Whatsapp has voiced plans for incorporating ads in their app on various occasions, and the most viable option yet is adding advertisements in the status section of their app. Currently, their main focus is their business app, which is a paid service offered by Whatsapp geared towards businesses. It is also the main source of income for the company.